Corporate Happy Talk and The Duty of Shareholder Loyalty

Yesterday the Business Roundtable released a “Statement on the Purpose of a Corporation” signed by 180 CEOs of major companies. It proclaims “a fundamental commitment to all of our stakeholders,” including customers, employees, suppliers, communities, and, finally, shareholders. It is being widely interpreted as a victory for anti-business campaigners and “corporate social responsibility” advocates, and perhaps also as a repudiation of the shareholder-primacy norm memorably defended (though in no way originated) by free-market economist Milton Friedman.

“It would be one thing if they said we’re endorsing having the Delaware courts change this particular legal doctrine, or we’re endorsing a bill in Congress,” said Walter Olson, a senior fellow at the libertarian Cato Institute. “It’s not really clear whether they’re intending to replace any part of the system or do the same things are before, but … smile more.”

Corporate law is a system of rights and corresponding duties that you can take to court. Of the multiple problems with proclaiming a new duty to a broad assortment of stakeholders, the main one, as UCLA lawprof Stephen Bainbridge has put it in a series of on-point articles, is that “managers who are responsible for everyone are responsible to no one.” A vague balancing test as to corporate officers’ and directors’ duties can leave them with more discretion than ever — if they want to close a high-cost plant, for example, they might regretfully decide the interests of customers, shareholders, and sales employees outweigh those of plant employees and communities, while if they choose to do the opposite they’ll have room for that too. Note that the BRT does not speak in terms of a duty that anyone in particular can sue to enforce. For that matter, familiar existing shareholder-primacy norms already allow plenty of leeway for decision-making that takes into account corporate reputation and image, political risk, and so forth — which is one reason the signatories to the BRT statement already engage in plenty of social-responsibility initiatives, some to be applauded and others less so.

Where a vague stakeholder-loyalty norm could really make a difference is in eroding the legal duty of loyalty currently owed to the investors who put up the capital. The chief battlefield is what is called the market for corporate control, as when a board decides whether to accept or spurn a lucrative takeover offer. The law of business organization has for centuries grappled with the “agency problem”: insiders can be strongly tempted to take actions that benefit themselves (by keeping them ensconced in managerial or controlling-owner positions, for example) even if an ownership change would benefit shareholders as a group as well as economic efficiency.

No wonder the Council of Institutional Investors — representing the pension funds, insurance pools, mutual-fund-owning retirees, and others whose interests depend on the duty of loyalty — doesn’t think much of the BRT statement.